BNP Paribas Securities keeps BUY on Bharti Airtel

The growth in the telecom sector has been aided by a strong political will. Even while operating in a capex heavy industry, Bharti is a debt free company. We expect the company to achieve positive free cash flows this year.

Also, there is no requirement for external funding in the next two years hence it will not face any effects of interest rate fluctuations.

Bharti would be able to use 3G spectrum to decongest its voice network due to its pan-India network. Strong balance sheet and positive free cash flow would support its 3G plans. Even a negative NPV on 3G deployments does not warrant the low multiples that markets are assigning to the stock.

We believe in the current market, new entrants business case has become extremely weak due to reducing revenue per minute, rising credit costs, risk averseness, currency depreciation (GSM equipment is imported) unwillingness of foreign operators to partner new entrants, their dependence on existing operators for infrastructure.

The company has also diversified revenue streams with 30% contribution from non-wireless businesses which consist of broadband, enterprise services and passive infrastructure leasing. The company will be launching DTH and Sri Lanka operations during FY09.

We have valued Bharti based on consolidated DCF including core business and tower business. We retain BUY rating and target price of Rs1,075, which translates into a FY09 P/E multiple of 23x. Our bear case valuation is Rs745 which is 16.7x FY09 EPS.